After a real estate investor identifies distressed property that has the potential to be brought up to habitable condition and that may be the subject of a short sale, the owner and, most importantly, the investor face the tough hurdle of obtaining the mortgage lender’s consent to a short sale.
Traditionally, most lenders have refused to even consider short sales because it means accepting less than the balance owed on the mortgage loan. Although the owner often remains on the hook for the balance due on the loan after the short sale proceeds are deducted, lenders usually have preferred foreclosing on property and then trying to sell it.
The U.S. government’s Home Affordable Mortgage Alternatives program (HAFA) is designed to encourage more lenders to agree to short sales. However, it is too early to know how many homeowners will qualify for HAFA., which went into effect on April 5, 2010.
Steps to Convincing a Lender to Agree to a Short Sale
When approached by a homeowner and prospective purchaser about a short sale, a lender that is considering consenting to a short sale will engage a real estate broker to give an unbiased opinion on the value of the property. According to an article by John Ochi, a California real estate broker, most of these opinions are based on just a drive-by look at the property, and it is only when an investor makes an issue of the inside of a home that the lender has the broker evaluate the interior as well.
The point at which the lender has the broker’s opinion about the value of the home based on both the exterior and interior conditions is when the investor needs to point out as many defects as possible to drive down the market value of the property. The investor should not hesitate to list even the smallest, easily fixed defects, such as missing ceiling tiles or walls that are overdue a painting. (But the investor should not create or fake defects – that amounts to mortgage fraud.)
To bolster the claim of defects, an investor may want to bring in a contractor to look at the property and give a written estimate of what it would cost to make the repairs and renovations that will bring the property up to habitable condition. The contractor’s estimate will also serve as an essential part of the investor’s due diligence in ascertaining the true cost of buying the property.
The last step is the tendering of a reasonable offer for the property. The lender must never get the sense that the investor is not serious about buying the property or that the investor and the seller are conspiring to fool or defraud the lender.
The investor should take the initiative to draw up the sale agreement and present it to the lender early in the negotiation process. By doing so, the investor increases the chance that the final version of the contract will contain many of the terms that are in his or her favor.
Keeping the Short Sale at Arm’s Length
Ochi points out at the end of his article that investors must bear in mind that they are not the ones who dug the financial hole in which distressed homeowners find themselves, and neither are they the ones who made the bad loans for the lenders. Instead, the role of an investor in a short sale is “to make the best of a bad situation for everyone.” Investors should remember this because they will often find that selling a home on the brink of foreclosure is an emotionally wrenching experience for owners.
This article is not meant to include all of the steps and precautions that an investor should take to buy property in a short sale. Short sales are complex transactions, particularly when there are second and third mortgages on a property. Many short sales are never completed, even after months of back-and-forth negotiations and submission of documentation. For these reasons, it is advisable for an investor to consult an attorney for guidance on how to put a short sale together.